Question

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 14% per year. Risky asset with expected return of 29% per year and standard deviation of 37%. If you construct a portfolio with a standard deviation of 28%, what is its expected rate of return? (Do not round your intermediate calculations. Round your answer to 1 decimal place.)

Answer 1

Answer:

25.4%

Explanation:

Portfolio standard deviation =  Proportion in the risky asset X Standard deviation of risky asset

                                               28 = 37x

Solving for x derives:-

                                         28/37  = x

Expected return of the portfolio =  14%( 1- (28/37)) + 29%(28/37)

                                                     = 25.4%

Therefore, the expected return on the portfolio is 25.4%.